A look at the fair value of Indutrade AB (publ) (STO:INDT)
Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Indutrade AB (publ) (STO:INDT) as an investment opportunity by estimating flows the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. This may sound complicated, but it’s actually quite simple!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
See our latest analysis for Indutrade
What is the estimated valuation?
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (SEK, millions) | kr2.97b | 3.30 kr | kr3.62b | kr3.85b | kr4.02b | kr4.15b | kr4.24b | kr4.32b | kr4.37b | kr4.41b |
Growth rate estimate Source | Analyst x3 | Analyst x3 | Analyst x3 | Is at 6.18% | Is at 4.42% | Is at 3.19% | Is at 2.32% | Is at 1.72% | Is at 1.3% | Is @ 1% |
Present value (SEK, million) discounted at 4.7% | kr2.8k | kr3.0k | kr3.2k | kr3.2k | kr3.2k | kr3.2k | kr3.1k | kr3.0k | kr2.9k | kr2.8k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = kr30b
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.3%. We discount terminal cash flows to present value at a cost of equity of 4.7%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = kr4.4b × (1 + 0.3%) ÷ (4.7%– 0.3%) = kr102b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= kr102b÷ ( 1 + 4.7%)^{ten}= kr64b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 95 billion kr. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of 235 kr, the company appears to be about fair value at a discount of 9.8% to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Indutrade as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 4.7%, which is based on a leveraged beta of 1.027. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
Although a business valuation is important, it is only one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Indutrade, there are three relevant elements you need to look at:
- Financial health: Does the INDT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Management:Have insiders increased their shares to take advantage of market sentiment about INDT’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every Swedish stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.